Thursday, May 30, 2019

China Raises Stakes In Trade War With Rare Earth Mineral Threat

China fired new shots in the trade war with simultaneous moves to halt soybean purchases from the US and a threat to restrict the supply of rare earth minerals used in the production of technology products such as mobile phones, electric vehicles, and smart weapons. American agriculture has already been hit hard by the trade war, but the threat to companies that import rare earths could spread the pain to the larger economy. The warning included a phrase that the Chinese used just prior to two separate wars in the past.

Bloomberg reported this morning that Chinese state purchasers have stopped goodwill orders of soybeans that began earlier this year as a resolution to the trade talks seemed close. China is the world’s largest buyer of soybeans and the country’s orders from US farmers had dropped from 6 million tons per month in early 2018 to almost nothing after the onset of the trade war. The obliteration of American soybean exports has required the Trump Administration to subsidize farmers for their trade war losses.

Even more alarming is the warning that comes from the People’s Daily, a Chinese state-controlled newspaper. In an opinion piece reported by CNN and others, the paper said, “At present, the United States completely overestimates its ability to control the global supply chain and is due to slap itself in the face when it sobers up from its happy, ignorant self-indulgence.”

“Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all?” the article asked rhetorically. “The answer is no mystery.”

“We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don't say we didn't warn you,” the article adds ominously.

An additional statement on Wednesday from the National Development and Reform Commission, China’s top economic planning agency, was more specific. Quoting an unnamed official, the statement said, “If anyone wants to use the products made from rare earths exported by China to contain and suppress the development of China, I think ... the people of China will not be happy.”

Rare earths are a series of 17 metals that tend to occur near each other in nature. The Rare Earth Alliance notes that due to their “unique magnetic, luminescent, and electrochemical properties, these elements help make many technologies perform with reduced weight, reduced emissions, and energy consumption; or give them greater efficiency, performance, miniaturization, speed, durability, and thermal stability.”

The minerals are not especially rare, but they are difficult to mine safely. China has about a third of the known deposits but controls about 90 percent of the world supply because of low labor costs and lax environmental regulations.

There is only one rare earth mine in the United States and it accounts for one-tenth of one percent of world production per CNBC. James Litinsky, co-chair of the investment group that owns the mine, explained that the rare earths mined in California must be shipped to China to be refined because there is no refining capacity elsewhere in the world. Litinsky said that the concentration of rare earths in other parts of the United States is not economical for mining.

Rare earths are important to national security as well as to the consumer economy. An interagency report to President Trump last year pointed out that the minerals are used in a variety of defense-related items including “lasers, radar, sonar, night vision systems, missile guidance, jet engines, and even alloys for armored vehicles.” Two-thirds of defense contractors imported rare earths with the vast majority coming from China.

The report also noted that China has worked to build a monopoly in the sector. The authors pointed out that “China has strategically flooded the global market with rare earths at subsidized prices, driven out competitors, and deterred new market entrants,” indicating that President Trump’s focus on the aluminum and steel industries has possibly been misguided. China has already embargoed export of the materials in a 2010 dispute with Japan.

CNBC also pointed out the baggage that comes with the phrase, “Don’t say we didn’t warn you.” The Chinese government used the same phrase in just before launching conventional wars against India in 1962 and Vietnam in 1979.

While China is unlikely to launch a military attack on the United States, the use of a phrase with specific military history underscores the seriousness with which the Chinese view the trade war. In a few short weeks since President Trump imposed heavy new tariffs on Chinese goods and launched attacks on Chinese technology company Huawei, China has fired back both with its own tariffs and increasingly bellicose rhetoric. A deal with China on trade seems less and less likely as both sides ratchet up protectionist measures and tensions.

President Trump is so far standing firm. This morning the president told reporters, “China would love to make a deal with us. We had a deal and they broke the deal. I think if they had it to do again, they wouldn’t do what they did.”

“The tariffs are having a devastating effect on China,” Trump claimed.

Tariffs are also having a devastating effect on American farmers. If China follows through on its threat to embargo rare earths, the effect could be devastating for technology companies and defense contractors. The pain from the trade war could hit both consumers and national security.

While China is feeling the pain as well, China’s authoritarian leaders are no doubt acutely aware of the American political calendar. China does not have to withstand a long-term trade war with the United States. They only have to ratchet up the pain level for American farmers, a prime Trump constituency in 2016, and consumers and then hold out until November 2020.

Originally published on the Resurgent

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